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Public Policy and Insurability

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Public Policy and Insurability The Geneva Papers on Risk and Insurance, 11 (No 39, April 1986), 145-156 Public Policy and Insurability by R. L. Carter* 1. The influence of public policy on insurance operations The intervention of government in the operations of the insurance industry has beenjus- tified on the grounds that it is "an industry affected with the public interest" [1], and Berliner asserts that if the industry wishes to defend its reputation in the eyes of the public it must uphold "the idea of insurance and of insurance ethics" [2]. So he goes on to argue that it is in long-term interests of individual insurers and of the industry that insurance should be pro- vided only if it is consistent with "public policy", in accordance with the following definition in Black's Law Dictiona,y: "... the community common sense and common conscience extended and applied throughout the state to matters of public morals, public health, public safety, public wel- fare, and the like; it is that general and well-settled public opinion relating to man's plain, palpable duty to his fellow men having due regard to all the circumstances of each particu- lar relation and situation." Although the principle may appear clear, its practical application presents various diffi- culties. There are in fact few hard and fast rules to guide insurers in deciding whether it would be contrary to public policy to provide insurance for particular risks, unless they happen to be associated with acts which have been ruled to be either criminal or illegal. However, whether to refuse to provide insurance or to pay claims in other cases, because to do so may seem to conflict with "general and well-settled public opinion", is often debateable. The changes that occur in public opinion over time add a further complication: what pre- viously may have been unacceptable behaviour may no longer be so, and vice versa, so that "public policy" is not an immutable constant. Furthermore, if a country's legislators have not been prepared to ban a particular act, why should an insurer refuse to enter into a contract in relation thereto? * Norwich Union Professor of Insurance Studies University of Nottingham 145 The changing attitudes of society The concept of public policy is inextricably linked to ethics and morality. Ethics may be defined in terms of what people "ought" to do, or what it is "right" for them to do, or refrain from doing, so setting standards against which behaviour can be judged. Morality relates to behaviour, being that which closely conforms to the accepted ethical norm. In other words, "morality is the practice of ethics" [31.Whether the standards to which mankind "ought" to adhere are absolute and immutable, or whether they are relative, depending upon the person, the circumstances and the time, has been the subject of endless philosophical debate. Pragma- tically, however, the inescapable fact is that the standards of behaviour which a society accepts as the norm not only vary from country to country, but also change over time. The relationship of morality to the laws enforced by a state raises other problems. Although the two may be closely related, they may not wholly coincide. For example, a crime has been defined as an immoral act, but: - governments prohibit many acts on grounds of social expediency rather than immorality (for example, some acts that may be committed in the course of business have been classi- fied as crimes mainly for the former rather than the latter reason); and - acts which may be regarded as immoral may not necessarily be treated as a crime. Moreover, even if the majority of public opinion is in favour of treating a certain act as a crime, it only becomes so when the necessary legislation is enacted. Two examples of behaviour towards which society's attitudes have changed radically this century are adultery and suicide. Although condemned in the Old Testament as warranting death by stoning, adultery long ago ceased to be a crime in most modern societies. Likewise, bowing to the change in public opinion, in 1961 the British Parliament decided that suicide while of sound mind, or any attempt to commit suicide, would no longer be treated as being criminal acts (Suicide Act, 1961). Other fundamental shifts of public opinion have occurred in relation to such matters as racial and sexual discrimination, and responsibility for environ- mental pollution, leading in due course to changes in the law. Such changes in public attitudes and thus in what may be construed as public policy can affect insurers in several ways. First, some of the changes that are occurring run counter to traditionally accepted insur- ance principles. The prime example would be the anti-discrimination provisions of race and sex discrimination Acts which may conflict with insurance premium rating principles. Secondly, a change in attitudes and laws in one country does not necessarily mean that similar changes have occurred elsewhere, as is evidenced by the treatment of adultery under the full rigours of Islamic law. Thus what constitutes "public policy" is a matter for local inter- pretation, so that an insurer operating internationally cannot adopt one set of rules for the whole of his global operations. Insurance ethics Long lists nine societal attributes which he sees as forming the "ethical pillars" of insur- ance [4]. Included in the list are honesty and obedience (that is, a willingness to obey the law): both present him with a dilemma in that deviations from those standards of behaviour form 146 the basis of the demand for certain classes of insurance, notably liability and theft insurances. He concludes that for insurance to function people generally must act honestly and be obed- ient to the law, and that any deviations therefrom must lie within tolerable limits. That begs the questions of what is tolerable, and whether the provision of insurance may encourage fur- ther deviation. The latter question embraces the phenomenon of moral hazard which lies out- side the scope of this paper. 4. Risks for which insurance should not be provided (a) Insurance contraly to public policy Obviously an insurer should refrain from entering into any contract of a type that has been declared illegal, even if not criminal, either on the grounds of public policy or public morality. Apart from those contracts which an insurer in the course of his international opera- tions may have entered into with persons residing in an enemy country prior to the outbreak of a war, there are few cases where insurance contracts would themselves fall within the class of contracts that in English law have been declared illegal either by statute or by the courts. However, there are cases where though the insurance contract itself may not have been illegal, the court has refused to enforce it on grounds of public policy. For example, in the case of Mackender vFeldia AG (1966) it was held that although an insurance contract effected to cover goods which were to be smuggled into a friendly country was not itself illegal, it would have been contrary to public policy to have enforced it. In a more recent case involving the same principle (Geismar v Sun Alliance and London Insurance Co. Ltd. (1977)), the policyholder had submitted a claim under his contents policies for the theft from his house of various articles, including a number of items which he had brought into the country deliberately without declaring them for the payment of customs duty. The court held that although the policies were not thereby illegal, it would have been contrary to public policy to have required the in- surers to have indemnified the policyholder for the stolen articles because they would have thereby assisted him to derive a profit from his deliberate breach of the law. The importance of insurers conforming to the dictates of public policy has even more force in those cases where the policyholder deliberately sets out to bring about a loss in order to claim against his insurers. In the classic case of Beresford v Royal Insurance Co. Ltd. (1938) the insurers refused payment under a life policy because the policyholder, who was badly in debt, had deliberately shot himself. He was found to have committed suicide while of sound mind, which at that time still was a criminal act, and the court held that it would be contrary to public policy to allow a man, even through his personal representatives after his death, to benefit from his crime. Likewise a policyholder who commits arson by deliberately setting fire to his own property in order to obtain the fire insurance monies would also be guilty of fraud if he proceeded to seek an indemnity from his insurers. Any relaxation of the law would inevi- tably tend to increase the incidence of arson and other acts of wilful destruction of property. However, attitudes do change, as noted above in the case of suicide, and in the opinion of many lawyers, insurers would now have to pay a claim for suicide in the absence of either a sui- cide clause in the policy or the non-disclosure of a material fact at the time the insurance was effected [5]. Moreover, the Forfeiture Act, 1982, opens the possibility of cases where an indivi- dual who unlawfully kills another may be allowed to benefit under a policy effected on the lat- ter's life, other than in a case of murder [6]. 147 Before leaving this point, it is worth noting that although the law may be clear that a poli- cyholder should not be allowed to collect from his insurers for losses caused by his own deli- berate act, it may also place obstacles in the path of insurers who seek to prevent that happen- ing.
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